JULY 24, 2020

By Rachit Jain, Partner and Ashwani Bhatia, Senior Associate

THIS article seeks attention of the importers of parts and components who are in a perpetual dilemma of classification between the entry for 'parts or accessories' vis-à-vis any other specific entry while classifying their products under the Customs Tariff Act, 1975 (with specific reference to automobile parts).

General understanding: An importer is usually of the view that all the components imported by it are only used for manufacturing of the main product and is designed in such a way that it cannot be used anywhere else. Therefore, it is referred to and classified as 'parts or accessories' of such main product. For instance, mats designed for a car have no other use and hence, they should be classifiable as 'accessory' to the car.

Before proceeding further, it is pertinent to clarify at this stage that a component may be called as a part or accessory to the main product, however, it does not ipso-facto mean that it is also classifiable as part or accessories to such product.

Public Notice on classification of parts and accessories of motor vehicles by Mumbai Customs ¹: The Mumbai Customs has issued a note wherein it considered classification of parts and accessories of automobiles which are meant to be used solely & principally with/for the goods of chapter 87 (vehicles). As per the note, the Directorate of Revenue Intelligence ('DRI') and Audit Commissionerates are of the view that such parts and accessories cannot be considered as 'parts of general use' and are therefore, required to be classified under appropriate headings of parts & accessories of Chapter 87. In addition to this, the Commissioner of Customs, JNCH, Nhava Sheva has issued a Public Notice No. 72/2019 dated 22.08.2019 classifying components as parts & accessories under Customs Tariff Heading ('CTH') 8708.

Thumb Rule of Classification: Rule 1 of General Rules of Interpretation ('GI Rules') provides for a thumb rule for classification matters. The basic principle provided in Rule 1 is that classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes.

If there is a thumb rule, why the disputes arise in classification: The reason for such disputes is that most of the components are either parts or accessories to the main product (as they can be used ONLY with the main product and have no other usage) and they may also be included, excluded or specifically provided in any other heading of the Customs Tariff. Let us take an example to understand the issue further:

Example: Classification of door handles or hinges of motor vehicle - Two competing entries are CTH 8302 (Base metal mountings, fittings and similar articles suitable for furniture, doors, staircases, windows, blinds, coachwork, saddlery, trunks, chests, caskets or the like) vs. CTH 8708 (Parts and accessories of the motor vehicles).

Relevant Provisions:

Section Note 2 to Section XVII provides that the expressions "parts" and "parts and accessories" do not apply to the following articles, whether or not they are identifiable as for the goods of this Section :

(b) parts of general use, as defined in Note 2 to Section XV, of base metal (Section XV), or similar goods of plastics (Chapter 39);

'Parts of general use' have been defined in note 2 to section XV which reads as follows:

2. Throughout this Schedule, the expression "parts of general use" means:

(a) articles of headings 7307, 7312, 7315, 7317 or 7318 and similar articles of other base metal;

(b) springs and leaves for springs, of base metal, other than clock or watch springs (heading 9114); and

(c) articles of headings 8301, 8302, 8308, 8310 and frames and mirrors, of base metal, of heading 8306.

The HSN explanatory note to CTH 8302 provides that

'This heading covers general purpose classes of base metal accessory fittings and mountings, such as are used largely on furniture, doors, windows, coachwork, etc. Goods within such general classes remain in this heading even if they are designed for particular uses (e.g., door handles or hinges for automobiles). The heading does not, however, extend to goods forming an essential part of the structure of the article, such as window frames or swivel devices for revolving chairs.'

Analysis of Provisions

As can be seen from the above, door handles are specifically included in HSN explanatory notes to CTH 8302 and are specifically excluded from purview of CTH 8708 as they are covered under the ambit of 'parts of general use'.

Two possible interpretations:

Firstly, as the door handles of cars are specifically included in the HSN explanatory note to CTH 8302, and they are specifically excluded from CTH 8708 as 'parts of general use', they are appropriately classifiable under CTH 8302.

Secondly, though the door handles are covered under CTH 8302 by virtue of HSN explanatory note, they remain classified under CTH 8708 as they are solely and principally designed for motor vehicle and have no other usage.

To resolve such disputes let us analyse the relevant judgments delivered by the Supreme Court.

Judgment 1: M/s. Cast Metal Industries Pvt. Ltd. vs. Commissioner of Central Excise, Kolkata, 2015 (325) E.L.T.471 (S.C): This case pertains to classification of door handles of motor vehicles. It was held that the goods in question (i.e. door handle or hinges) are meant for specific purpose viz. in the motor vehicles that too for specific model of the motor vehicles as its parts, therefore, these are appropriately classifiable under CTH 8708.

As regards HSN Explanatory Note to CTH 8302 and exclusion of 'parts of general use' from CTH 8708, the Supreme Court observed that the subject goods are not general purpose door handles. Hence, it was ruled that 8708 is the appropriate classification.

The Apex Court relied on the principle enunciated in G.S. Auto International Ltd. vs. Collector of C. Ex., Chandigarh, - 2003-TIOL-92-SC-CX wherein it was held that 'the true test for classification was the test of commercial identity and not the functional test. It needs to be ascertained as to how the goods in question are referred to in the market by those who deal with them, be it for the purposes of selling, purchasing or otherwise.'

It was also held in GS Auto (supra) that for classification under CTH 8708, the test to be applied is whether the goods are suitable for use solely or primarily with articles of CTH 8701 to 8705. If the answer is in the affirmative, the goods will be classifiable under CTH 8708, but if the answer is in the negative, they would have to be classified under respective CTHs.

Judgment 2: CCE Delhi III vs. Uni Products Limited, - 2020-TIOL-91-SC-CX: This judgment deals with classification of mats for motor vehicles. The Supreme Court held that the car mats are specifically excluded from scope of CTH 8708 and are fulfilling the requisites mentioned in CTH 5703, hence they are appropriately classifiable under CTH 5703, even though they are used solely and principally in motor vehicles. The Supreme Court affirmed the decision of the Tribunal reported at 2008-TIOL-1674-CESTAT-DEL.

The Supreme Court rejected the argument of the Revenue that as car mats are made specifically for cars and are also used in cars, these should be identified as accessories, by stating that if we accept that logic, textile carpets could not have been excluded from the ambit of 'Parts and Accessories' under CTH 8708. The Supreme Court has laid down the following guidelines in Uni Products (Supra):

1. Section Notes and Chapter Notes are of utmost importance to determine classification;

2. According to HSN explanatory note to Section XVII, all following three conditions must be fulfilled to classify any product as parts or accessories namely, (a) They must not be excluded by the terms of Note 2 to Section XVII, and (b) They must be suitable for use solely or principally with the articles of Chapters 86 to 88, and (c) They must not be more specifically included elsewhere in the Nomenclature

3. Even though HSN Explanatory Notes have persuasive value only, but the level or quality of such persuasive value is very strong, as observed in numerous judgments ².

4. The most specific description shall be preferred to headings providing general description as per Rule 3(a) to GI Rules.

5. Emphasis on technical meaning can be given as has been highlighted in the case of Commissioner of Central Excise vs. Wockhardt Life Sciences Limited, - 2012-TIOL-24-SC-CX for resolving classification disputes.

6. "The common parlance test", "marketability test", "popular meaning test" are all tools for interpretation to arrive at a decision on proper classification of a tariff entry. These tests, however, would be required to be applied if a product is capable of being classified in more than one heading.

Are Uni Products and G.S. Auto/Cast Metal judgments at loggerheads?

If one applies the test of G.S. Auto and Cast Metal (supra), then car mats, used solely and primarily with motor vehicles, are classifiable under CTH 8708, irrespective of the specific exclusion given therein.

One interpretation can be that once a tariff heading is specifically excluded by virtue of a section note, then the product cannot be classifiable under CTH 8708 notwithstanding the fact that it is solely and principally used with motor vehicle.

The Supreme Court discarded the HSN explanatory Note ³ to CTH 8302 in Cast Metal (supra) on the ground that this HSN note would not be applicable as it is HSN Note which has diversion with the relevant entry and as the very first line thereof mentions that it covers those goods which are meant for "general purpose" and not for specific purpose.

However, in Uni Products (supra), the Apex Court has relied upon the exclusion of HSN Explanatory Notes, which may be considered as a departure from the law laid down in Cast Metal (Supra).

Our view and the way forward for importers:

If any product is excluded or included specifically by name, description or CTH by virtue of section notes or chapter notes, the same must be excluded or included, as the case may be.

Once an importer crosses the hurdle of inclusions/ exclusions, it has to be seen if the product is suitable for use solely or principally with the articles of Chapters 86 to 88, and it must not be more specifically included elsewhere in the Nomenclature. Only in this situation, the product would be appropriately classifiable as 'parts and accessories'.

However, the test is easier said than done and each product would require re-consideration in light of divergent judgments delivered by the Supreme Court. In our view, the foregoing analysis is not merely restricted to automobile parts and accessories, but is equally applicable while classifying any product as parts.

According to us, the judgment in Uni Products (supra) is a correct decision which saves importers from classifying each and every product as 'parts and accessories' of motor vehicles under CTH 8708, which generally attracts higher rate of customs duty.

However, the Supreme Court in the case of Uni Products (supra) has not considered the judgment of GS Auto (supra). Therefore, in view of the conflicting positions taken by GS Auto (supra) and Uni Products (supra), the issue may finally be settled only by a Larger Bench of the Supreme Court as and when a reference is made.

In the meantime, Revenue may continue to take a view that the goods suitable for use solely or primarily with articles of CTH 8701 to 8705, are classifiable under CTH 8708 basis Public Notices and GS Auto (supra). The view is driven by the fact that usually higher rate of duty leviable is in CTH 8708 as compared to other CTHs. However, this may not be the correct legal position in every case and classification needs to be examined on case to case basis by applying the foregoing legal principles.

[The authors are Advocates in Lakshmikumaran and Sridharan Attorneys, New Delhi. The views expressed in this article are strictly personal.]

¹ Public Noticee issued vide F.No. S/3-Misc-03/2019-20/GrVB/ACC dated 21.05.2019 by the Additional Commissioner of Customs (I), Office of the Commissioner of Customs (Import), Air Cargo Complex, Sahar, Andheri (E), Mumbai - 400099- http://accmumbai.gov.in/aircargo/miscellaneous/standing_order/2019/Standing-Order-dated-21-05-2019.pdf

² CCE vs. Wood Craft Products Ltd., 2002-TIOL-278-SC-CX-LB; Collector of Central Excise vs. Bakelite Hylam [1997 (91) E.L.T. 13 (S.C.)]; Collector of Customs vs. Business Forms Ltd., - 2002-TIOL-277-SC-CUS-LB; and Holostick India Ltd. vs. Commissioner of Central Excise, - 2015-TIOL-60-SC-CX.

³ 'This heading covers general purpose classes of base metal accessory fittings and mountings, such as are used largely on furniture, doors, windows, coach work etc. Goods within such general classes remain in this heading even if they are designed for particular uses (e.g. door handles or hinges for automobiles). The heading does not, however, extend to goods forming as essential part of the structure of the article, such as window frames or swivel devices for revolving chairs.'